During an election season, candidates are often criticized for making a higher income but in turn paying less in income tax. Although this may appear to be unfair, taxpayers are allowed the option to arrange their affairs so they can lessen the amount of taxes they pay.
The salaries, wages and commissions we make, as well as dividends and interest are taxed at regular income tax rates which range from 10% to 39.6% depending on your income level. In contrast, capital gains rates on property you hold longer than 12 months is taxed at a much lower rate which ranges from 0% to 20%. Taxpayers that are in the 25-35% bracket will pay LTCG (long-term capital gains) rates of 15%.
Any profit you gain on rental property would enjoy the LTCG rates when compared to profit gained on “flipped” or quick turnaround property which is taxed at the higher ordinary income tax rate.
By investing in a rental home, you are generating income, taking advantage of depreciation for a tax shelter, building equity with the amortizing loan, and have leveraged growth due to the borrowed funds and appreciation. Your profits on a rental home could be a lot higher than that of alternative investments with profits taxed at lower rates.
This advantage I have described is available to all taxpayers, not just rich ones. By understanding the tax laws and choosing to arrange your activities so you pay minimal tax, you can increase your family’s wealth.
Seek the advice of your tax professional before you make any decisions. Contact me today for a referral.
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